What Happens If You Can’t Pay Your Taxes?

What happens if you complete your tax reappearance and find that you ca n’t pay the measure you owe ?

This is n’t supposed to happen. You ‘re supposed to pay income taxes gradually throughout the class so that in April you wo n’t owe much or will even be entitled to a refund of overpay taxes. Employees have income tax withhold from their paychecks. freelance taxpayers pay quarterly estimated taxes immediately to the Internal Revenue Service ( IRS ) .

But sometimes your liveliness situation changes or an strange erstwhile event occurs during the class. When you prepare your annual hark back, you may get an ugly surprise—you owe hundreds or thousands of dollars that you did n’t expect and merely do n’t have .

While this is n’t a good site to be in, it ‘s not the end of the universe. There are a numeral of ways to resolve it.

Key Takeaways

  • When you do not pay your taxes by the due date, you will start to accrue interest and penalties on the outstanding amount.
  • As time goes on, you may be subject to liens on your property or garnishment of your wages.
  • In the most extreme tax evasion situations, you may even be subject to up to five years in jail.
  • Be sure to file your tax return on time, even if you can’t pay your tax liability at that time, to avoid additional failure-to-file penalties.
  • In order to pay your tax bill on time, you could charge your liability to your credit card for a convenience fee or apply for a debt consolidation loan.
  • You can also withdraw from your existing savings such as your emergency fund, a HELOC, or a retirement account.

What Happens If You Do n’t File or Do n’t Pay

If you find yourself in trouble, you do not want to skip filing your tax return or fail to pay your taxes altogether. The government has the authority to forcibly seize your assets if you do n’t try to make good on your income tax liability. In the most extreme situations, you may be subject to imprison time .

There are a count of scenarios that can lead to penalties and interest charges. The two independent ones are filing your tax return key late and paying your taxes deep .

Residents and business owners in Louisiana and parts of Mississippi, New York, and New Jersey were granted extensions on their deadlines for filings and payments to the IRS due to Hurricane Ida. Due to the tornado in December 2021, taxpayers in parts of Kentucky were besides granted extensions. You can consult IRS disaster respite announcements to determine your eligibility.

Filing Your Taxes recently

If you are not going to be able to file your tax render by the deadline, you should file an extension of time to file by submitting kind 4868 to the IRS by the due date ( typically April 15th ) .

It is important to note that filing this human body does not give you an reference on the time to pay your tax liability. You ‘re calm expected to send any money you owe by the deadline .

even if you file a shape 4868, you will need to be certain that your tax liability has been paid ( or more conservatively, overpaid, with a refund due at the time you actually file your come back ). If you file your tax return late—or fail to file at all—you will be submit to failure-to-file penalties. These charges accrue on returns that have not been filed by the due date ( or extended due date, if you ‘ve filed a form 4868 ) .

The charges accrue at a rate of 5 % of the unpaid taxes for each calendar month or share of a calendar month that a tax return is late. The charges max out after five months, at which point the failure-to-file penalty is 25 % of the unpaid tax indebtedness .

If your render is filed more than 60 days after the due date ( or extended due date ), the minimum failure-to-file punishment is $ 435 or 100 % of your total tax indebtedness ( for tax returns with a ascribable date after Dec. 31, 2020 ), whichever is smaller .

As you can see, filing late does not pay off, with or without an extension. even if you do not have the funds to pay your outstanding tax liability by the ascribable date, you should hush file your tax tax return so you do n’t incur supernumerary failure-to-file penalties on top of failure-to-pay penalties and sake .

Paying Your Taxes late

You might be tempted to send in your tax return but not pay the money you owe. If you fail to pay your taxes by the due date, you will begin to accrue matter to and penalties on the outstanding amount .

The interest rate for failure-to-pay is the union short-run rate plus 3 %, compounded daily after the due date ( whether or not you filed an extension of time to file your return ) .

The failure-to-pay penalty charge is calculated at a rate of 0.5 % of the great tax liability for every month the debt remains amateur, up to a maximum of 25 %. If you have not filed your tax recurrence and have not paid your tax liability, both failure-to-file and failure-to-pay charges are applicable. In this shell, the charge each calendar month is a maximum 5 % ( 4.5 % for failure-to-file and 0.5 % for failure-to-pay ) .

The maximal penalty for failure-to-file and failure-to-pay is 47.5 % of your total tax indebtedness ( 22.5 % for late filing—maxed out after 5 months, and 25 % for late payment—maxed out after 50 months ) .

At a certain distributor point, the government will issue you a letter demanding payment for your unpaid tax balance. If you ignore this letter, the IRS may file a Notice of Federal Tax Lien to alert creditors that the IRS has a right to your personal property, real estate, or early assets. A lien secures the government ‘s sake in your property .

If the debt goes unpaid for much longer, the IRS may issue a levy. An IRS levy initiates the legal seizure of your assets in ordering to satisfy your outstanding tax debt. Levies come in many forms and may include garnishing your wages via your employer, seizing your assets immediately from a savings bank account, or seizing and selling your property such as a vehicle or a home .

In the most extreme cases, the IRS may pursue criminal charges against you for tax evasion. intentionally avoiding paying your tax liability, more normally referred to as tax evasion, is a serious crime with a penalty of up to five years in jail .

Although this final examination step is much reserved for the most serious tax evasion cases with boastfully outstanding balances, it is best to err on the side of caution. If you get an initial letter for recently payment, set up a plan with the IRS to get your taxes paid arsenic soon as possible.

Options to Help You Pay Your Taxes

here are a few ways to get you out of your predicament.

Borrow Money

For a convenience fee of about 2 %, you can charge your tax liability to your credit circuit board. You could besides apply for a debt consolidation lend from a bank or credit union .

If you choose one of these options, you ‘ll have made good with the politics, but you ‘ll be shifting your debt to an expensive source. Unless you have a credit menu with a very humble annual share rate ( APR ) or are able to secure a personal lend at a identical low pastime pace, you might be making your long-run situation worse .

For example, if you owed $ 5,000 in taxes, the appliance fee to charge this amount to your citation wag would amount to about $ 100. If you had to carry that $ 5,100 libra on your menu for a year at, say, 20 % APR, that would add another $ 1,020 to your bill, bringing the total you owed to $ 6,120 .

Request a payment extension

Filing a six-month tax-filing propagation using Form 4868 wo n’t help. This extension alone gives you more fourth dimension to file your paperwork ; it does n’t give you more time to pay what you owe .

Filing your return on time can help minimize the penalty and interest charges assessed by the IRS. The IRS ‘s late payment penalty is 0.5 % per calendar month, up to a utmost of 25 % ; the deep file penalty is 5 % per month, up to a utmost of 25 %. so just filing your refund on time can save you a solid measure in penalties .

If you believe you have a lawful sheath due to excessive adversity, you can file class 1127 to request a six-month payment extension. Along with this mannequin, you ‘ll have to submit a argument of all your current assets and liabilities and an itemize statement of all the money you ‘ve received and spent in the last three months .

The IRS rarely grants requital extensions, and it will only be granted if you can demonstrate undue adversity. If you just bought a 60 ” flat-screen television last calendar month because you had no theme you were going to owe $ 5,000 in taxes, you ‘re not going to qualify for a adversity extension .

Apply for an Installment agreement

If you think it will take you more than a few months to pay your tax indebtedness, consider applying for an installment agreement. You can apply online at IRS.gov or by mail using Form 9465 -FS .

An installment agreement can prevent the IRS from taking enforced collection military action. You ‘ll still owe penalties and matter to, but your monthly payments let the IRS know that you intend to make dear on what you owe .

borrow From Yourself

If you have an hand brake fund, this is a full meter to dip into those savings. You can use your hand brake investment company as an interest-free loanword to yourself to pay off your tax placard and then start replenishing your fund with each paycheck .

If you own a home and you have adequate equity, another manner to borrow from yourself is with a base fairness line of credit ( HELOC ) .

These loans have relatively low matter to rates compared to credit cards and personal loans. The downside is that your house serves as collateral. Defaulting on a base fairness loan or HELOC is like defaulting on your mortgage—it can cause you to lose your house .

however, borrowing money this way will turn the large collocate sum you owe the IRS into a accomplishable monthly requital to a mortgage lender .

Another option is to borrow from a retirement report like a 401 ( kilobyte ) or IRA. Because retirement accounts have tax advantages, withdrawing money from them can trigger a tax liability, including a 10 % early on withdrawal penalty, if you do n’t follow protocol. It besides damages your retirement savings design .

Anticipate Late Fees and Penalties

unfortunately, the IRS is going to charge you interest and penalties on any amount you pay late. Like running a proportion due on a accredit batting order, these charges are going to make it harder to pay what you owe .

The more you ‘re able to pay on time, the less interest and penalties you ‘ll be assessed .

The IRS will finally send you a beak, but you do n’t have to wait to get the bill to make extra payments .

Pay what you can when you file your hark back, then send in whatever extra payment you can afford each payday using Form 1040-V .

The Bottom Line

Whatever you do, do n’t ignore the problem. The government has the agency to forcibly seize your assets if you do n’t try to make good on your income tax liability. The IRS can freeze your bank accounts ; garnish your wages ; seize physical assets, such as your cable car ; and place a lien on any assets you own, including your home .

If you find you ca n’t pay what you owe, go ahead and file your return and pay what you can. then work with the IRS, possibly with the aid of a tax professional, to formulate a design for paying the proportion of your tax charge over time .